RBA reserves judgement on flood effects

The RBA has kept official interest rates on hold despite the impact of floods on the economy.

Transcript

TICKY FULLERTON, PRESENTER: It may be Australia's biggest natural disaster, but the floods have yet to change the Reserve Bank's thinking.

As expected, the RBA kept official rates on hold and reserved its final judgment on the floods' impact. That final judgment could change if the latest business survey is any guide.

Here's Phillip Lasker.

PHILLIP LASKER, REPORTER: The devastating floods may have blown a state economy and many thousands of lives way off course, but not the Reserve Bank.

SHANE OLIVER, AMP CAPITAL INVESTORS: Well the Reserve is basically saying that there will be a short-term adverse impact on both prices and growth.

But it's essentially saying that it's prepared to look through that; it'll focus on the medium-term outlook for the economy, and on that basis it doesn't see a major impact coming through from the floods.

PHILLIP LASKER: While the RBA acknowledges it's too early to be sure, its preliminary assessment is that overall demand from the rebuilding effort in Queensland, "... is unlikely to have a major impact on the medium term outlook for inflation." So, as expected, the cash rate stayed at 4.75 per cent.

WAYNE GORDON, RABOBANK: I think that they're very concerned about not overestimating the impact of the floods and its impact on overall economic performance for 2011 in particular.

PHILLIP LASKER: The RBA would've seen an improvement in business conditions in December's National Australia Bank survey, with rises in trading performance, profitability and employment. But the floods were beginning to dent confidence.

ALAN OSTER, NAB: We were very concerned in terms of what it was showing. I mean, you look back and you can probably understand why confidence is so bad. But we were also a little bit surprised when actual activity levels were as bad as what they were in Queensland.

PHILLIP LASKER: While the nation's business conditions improved, Queensland's confidence and conditions measures plunged to levels not seen since the height of the global financial crisis and the January survey, which will include flooding in Brisbane and Victoria, is yet to be seen.

ALAN OSTER: In the short term, the disruption effect is probably going to be larger than what Treasury said. Treasury talked in the financial year of a detraction of around about a half a per cent. We're talking around about .8, .9 detraction.

PHILLIP LASKER: Manufacturers have been battling more than the floods. A key manufacturing index was below 50 again in December for the fifth straight month, which means the sector continued shrinking.

The Australian Industry Group says it's a symptom of a strong Australian dollar and wage pressures hampering growth as manufacturers compete with the mining industry for workers.

As far as the Reserve Bank is concerned, the resources boom is still the main game.

TIM HARCOURT, AUSTRADE: There's short-term impact, but the long-term global impact of demand from China and India ultimately is more important and that's why Australia is in good long-term shape.